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FRC publishes a statement on the Government's Green Finance Strategy

03 Jul 2019

The Government has announced its Green Finance Strategy which recognises the role of the financial sector in delivering global and domestic climate and environmental objectives. In response, the Financial Reporting Council (FRC) has issued a joint statement with other financial regulators, including the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) welcoming the strategy.

The FRC has made its expectations of UK boards very clear stating:

The Boards of UK companies have a responsibility to consider their impact on the environment and the likely consequences of any business decisions in the long-term. They should therefore address, and where relevant report on, the effects of climate change (both direct and indirect). Reporting should set out how the company has taken into account the resilience of the company’s business model and its risks, uncertainties and viability in both the immediate and longer-term in light of climate change. Companies should also reflect the current or future impacts of climate change on their financial position, for example in the valuation of their assets, assumptions used in impairment testing, depreciation rates, decommissioning, restoration and other similar liabilities and financial risk disclosures.

In its statement, the FRC highlights the following activities which it has undertaken (or is planning to undertake) to assists companies, their Boards and investors to fulfil their responsibilities:

The updated UK Corporate Governance Code requires Boards to discuss how the matters (which include environmental matters) set out in section 172 of the Companies Act 2006 have been considered by the company and report on how opportunities and risk to the future success of the business have been considered and addressed.

The Strategic Report requires companies to report on their principal risks and environmental matters when material. The FRC’s Guidance on the Strategic Report has been updated to encourage better reporting on non-financial matters and the requirement for companies to report on the responsibilities of directors under section 172, that includes how they have regard to the environment in their business operations.

The new UK Stewardship Code will require investors to integrate stewardship and investment, taking into account material environmental, social and governance issues, including climate change.

In order to monitor how companies and their advisors fulfil their responsibilities, the FRC will, as part of its Corporate Reporting Review, continue to review whether companies are complying with the statutory disclosure requirements of the strategic report (which includes reporting on principal risks and uncertainties) as well as any financial statement implications of climate change. As part of its Audit Quality Review, the FRC will also include consideration of the adequacy of the auditors’ work on principal risk disclosures, including climate risk and the financial statement implications of climate change.

Later in the year, the Financial Reporting Lab will provide practical guidance on how companies can best consider and report on climate related risk and opportunities.